ACCA Advanced Audit and Assurance (AAA) Practice Exam

During an audit, what is the primary responsibility for fraud prevention and detection according to ISA 240?

1. The external auditor

2. Management and those charged with governance

3. The shareholders of the entity

4. The internal audit function

The correct answer is: Management and those charged with governance

The primary responsibility for fraud prevention and detection rests with management and those charged with governance, as outlined in ISA 240. This standard emphasizes that management is responsible for maintaining internal controls that prevent and detect fraud. They are expected to create a culture of honesty and ethical behavior, as well as to implement appropriate policies and procedures to mitigate the risk of fraud within the organization. Additionally, those charged with governance, such as the board of directors or audit committee, play a crucial role in overseeing the integrity of financial reporting and ensuring that management fulfills its responsibilities regarding fraud prevention. Their involvement is essential because they provide oversight and ensure that proper processes are in place to address any signs of fraud. While auditors are tasked with evaluating the risks of material misstatement due to fraud during their audit procedures, their role is to identify and respond to these risks rather than to have the foremost responsibility for prevention and detection. Ultimately, the accountability lies with management and governance structures within the entity itself.